Putin’s Tools of Sabotage Beat Urgency of Ukraine Invasion

March 20, 2014

March 20 (Bloomberg) — After annexing Crimea, Russian President Vladimir Putin may not need to invade the rest of Ukraine to bring it to its knees. Political and financial sabotage can work just as well.

While Putin promised that Russia isn’t about to send in troops, he has plenty of other tools to undermine the Western-backed Ukrainian government. They include fomenting insurrection by Russian-speakers, waging a cyberwar, visa restrictions and crippling Ukraine financially by ramping up natural gas prices and demanding the repayment of billions of dollars in debts.

“Putin has the means to drastically destabilize Ukraine,” Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, said by phone. “The more problems and unrest, the better his chances of getting east Ukraine to exit and join Russia.”

More than two decades after the collapse of the Soviet Union, Ukraine’s pro-Western ambitions represent the biggest challenge for Putin as he seeks to project Russian power in his backyard.

Putin, in a speech to lawmakers on March 18, accused the West of relentlessly encroaching on Russia’s interests since the end of the Cold War as the European Union and North Atlantic Treaty Organization expanded eastward. He described Ukraine, where leaked audio recordings have shown U.S. diplomats discussing how to oust Moscow-backed President Viktor Yanukovych and who should replace him, as the last straw.

‘Crossed Line’

“Everything has its limits,” Putin said. “And in the case of Ukraine, our Western partners have crossed the line.”

The U.S. and the EU have branded the March 16 referendum that paved the way for Russia’s annexation of Crimea illegal, imposing sanctions and warning of escalating measures to come. The worst standoff between the West and Russia since the Cold War looks set to intensify even without direct Russian military intervention in the rest of Ukraine.

As Putin seeks to counter Western influence in Ukraine, Russia says its neighbor should adopt a new federal constitution that guarantees political and military neutrality, grants powers to the regions, and make Russian a second official language.

There’s no indication that would be acceptable to the Ukrainian government, which took power after Yanukovych was toppled amid protests last month, or to its Western supporters.

Invasion Option

For Putin, seeking leverage to enforce his vision of Ukraine’s future, invasion is a high risk option because it could draw in irregular forces against Russian troops and trigger much tougher Western sanctions. Its probability is less than half, according to the New York-based Eurasia Group, which analyzes political risk.

Russia won’t deploy troops in eastern Ukraine unless mass killings occur there, Sergei Mironov, leader of the pro-Kremlin Just Russia party, told reporters yesterday in Moscow.

Russia may opt to use economic levers first, including a temporary cut-off of gas supplies and an increase in prices, Eurasia said in a research note this week. Ukraine needs $15 billion to repay foreign debt after investors withdrew funds. Since its European and U.S. allies are effectively on the hook for that debt, adding to the repayment burden “punishes Ukraine and consequently the West as well,” Eurasia said.

Soviet Debt

Russia also warned this week that it may demand repayment of $20 billion in Soviet-era debt from Ukraine. That followed a threat by Ukraine’s interim prime minister, Arseniy Yatsenyuk, to review the division of Soviet property.

Ukraine’s economy faces a squeeze even without additional pressure from Putin. After rebounding 3.7 percent in the fourth quarter from a year earlier, it is set to slip back into a “disastrous” recession this year as a result of the crisis, according to London-based Capital Economics.

Russia doesn’t plan to demand early redemption of $3 billion of Ukraine bailout bonds it bought in December, expecting them to be repaid on time in 2015, Finance Minister Anton Siluanov told reporters today in Moscow. His deputy, Sergey Storchak, said Russia wants economic stability in the neighboring country, Prime news service reported yesterday.

Even with the standoff over Crimea, Ukraine will meet payments on the Eurobonds it sold to Russia three months before Putin’s military incursion into the Black Sea region, a Finance Ministry official in Kiev said yesterday.

Unpopular Government

A proposed bailout by the International Monetary Fund and EU will come with strings attached, requiring austerity measures that will hurt household incomes, said Lilit Gevorgyan, senior analyst at IHS Global Insight in London.

“If Russia’s goal is to make the current Ukrainian government unpopular, Moscow does not have to do much in the coming year,” Gevorgyan said by e-mail.

Economic pain may increase if Russia retaliates against plans by Ukraine to introduce a visa regime announced yesterday by Andriy Parubiy, head of the Ukrainian National Security Council. Two million Ukrainians live in Russia, according to a 2010 census, though the actual number may be as high as 10 million, according to the Russian Embassy in Kiev.

Visa ‘Suicide’

“It’s suicide,” said Alexei Mukhin, head of the Center for Political Information in Moscow, noting that Ukrainian migrants depend on Russia for work. “It will lead to very serious consequences inside Ukraine.”

Putin also has low-level military options that fall short of conventional models of warfare.

Andrei Illarionov, a former economic adviser to Putin, said the Russian leader is using special forces as well as activists in eastern cities such as Donetsk, Kharkiv and Luhansk to whip up rebellion. Clashes between pro-Russia and anti-Kremlin protesters turned deadly in Donetsk and Kharkiv last week.

Ihor Baluta, the governor of Kharkiv, said Russia is bolstering troops on the border. They’re concentrated along highways for rapid invasion, as Putin tries to “pump in separatism” and replicate the Crimean situation elsewhere in the east, he said in an interview March 18.

Sergei Markov, a Kremlin adviser, confirmed that such fears aren’t groundless. Russian speakers in eastern Ukraine have already seized government buildings, he said by phone on March 18 from Simferopol, Crimea. If they’re suppressed by the authorities in Kiev then “the Russian army will have to come to their assistance.”

‘Dirty War’

Organized provocation has been going on for three weeks already, with Ukrainian reports of cyberwar, according to Timothy Snyder, professor of central and eastern European history at Yale University.

“If there is conflict in eastern Ukraine it will be a continuation of dirty war tactics, and escalation will likely be a formal invasion,” Snyder said in a phone interview from London.

Hackers have launched attacks on the websites of state agencies and publications on both sides. A Russian government watchdog has ordered a shutdown of the social-network pages of Ukrainian nationalist groups. A Ukrainian phone company said its network in parts of the Crimean peninsula was damaged as unidentified men took over communication centers.

Ukraine Election

Putin’s strategy is aimed at influencing the Ukrainian presidential election due on May 25, and its outcome may change his calculations, according to SGH Macro Advisors, a New York-based research group.

Russia would be most comfortable with Yulia Tymoshenko, the former premier who was freed from jail last month after the fall of Yanukovych, SGH said in a March 17 report. Even a victory by Vitali Klitschko, a former boxing champion and one of the pro-Western political leaders, may allow for a thaw in relations with Moscow, it said.

Putin once described the collapse of the Soviet Union as the greatest geopolitical catastrophe of the 20th century. His aim is to recreate it “one way or another,” according to Romanian President Traian Basescu, whose country has made the transition from Soviet satellite to EU member.

“When he can do it with a good word, fine,” Basescu said in an interview with Adevarul TV on March 17. “When he can’t, he’ll send in the tanks.”

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Ben Holland, Paul Abelsky, Torrey Clark

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